Rising tax revenues: A key to economic development in emerging Asian countries

06/05/2014 - Tax revenues are currently rising as a proportion of national incomes in Indonesia and Malaysia but continue to be substantially lower than for Korea, Japan and other OECD countries, according to a new OECD report.

Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people. Additional tax revenues enable governments to simultaneously strengthen infrastructure development, enhance the quality of education and promote social cohesion.

Key findings

Since 2000, tax to GDP ratios have increased by 4 percentage points in Indonesia (9 to 13%) and 3 percentage points in Malaysia (14 to 17%). However, the latest 2012 figures are significantly lower than those for Korea (27%), Japan (29%) and the OECD average (34.6%).

Taxes on incomes and profits are particularly important in Indonesia and Malaysia, representing 44% and 71% of tax revenues in each country, respectively. This compares with 30% in both Japan and Korea and 34% for OECD countries.

Consumption taxes represent 46% of revenues in Indonesia and 21% in Malaysia compared with 31% in the OECD. The collection of social security contributions in both these Asian countries is much smaller than in the OECD.

The findings in the report suggest that both Indonesia and Malaysia could benefit from some tax reforms. For example, the fuel subsidy in Indonesia and the GST (goods and services tax) in Malaysia could be reviewed, particularly as their economies continue to grow and experience structural transformations such as the expanding so called “middle classes”.